Great Things Come In Small Packages

By Alex Otti; alex.otti@thisdaylive.com

‘There is no one giant step that does it. It’s a lot of little steps’. – Peter A. Cohen

‘A mighty flame followeth a tiny spark’. – Dante

My purpose for getting his attention was not just to simply shake hands with him. I needed to confirm from him, a story a friend of mine told me a few years ago. The story goes this way. Before Bill Gates got married, he saw a beautiful girl and chased her. He was not as popular nor as rich as he is today. So, the girl gave him a little tough time. After so much persistence, the lady consented. Shortly after consummating their relationship, the lady stormed out and remarked, “now I understand why you named it Microsoft”. Since I did not speak to him, this story remains unconfirmed. 

Having taken your indulgence so far, let us get more serious in the manner of this column. All over the world, it has been established that the engine of growth of the economy is never big business, but the small ones. These small ones are popularly called Micro, Small and Medium Scale Enterprises (MSMEs) or SMEs. Different explanations and definitions exist for MSMEs. For purposes of this column, we shall adopt the definition popularised by the Small and Medium Enterprises Development Agency of Nigeria, SMEDAN. According to SMEDAN, an SME can be defined as an enterprise employing up to 199 people and with assets up to N250m excluding land and working capital. This definition largely agrees with the Central Bank of Nigeria definition except that in the case of the latter, another criterion , turnover of N500m is introduced.

Most current Statistics have it that MSMEs contribute about N39t to Nigeria’s GDP or about 48.7% of the GDP. They also account for no less than 7% of export earnings. The number of MSMEs in the country is put at about 37m, employing close to 60m people or 80% of the workforce. It is also estimated that they account for about 97% of the total number of business enterprises in Nigeria.

When you look at the above numbers, they are in agreement with the numbers in other countries, particularly, the developed world. For instance, in South Africa, MSMEs account for 91% of businesses in the country, 54% of GDP and 60% of employment. In the USA, MSMEs account for 98% of the total businesses in the country, contributing about 40% to GDP and providing 53% of employment. In Germany, they account for  99.6% of businesses, 75% of GDP and provide 62% of jobs. In China, MSMEs represent 99% of total businesses, contributing 58.5% to GDP and employing 75% of workforce. Given that we share similar numbers with other countries, particularly the developed countries, the question should then be: what is wrong with MSMEs in Nigeria? On the face of it, one can argue that to the extent that there is consistency with the numbers, there is nothing fundamentally wrong. That will, however, be missing the point. The major problem is with the measurement itself, the statistics and its misleading conclusions. Because ours remains a fragile and distorted economy where the base is quite small, measurement on the basis of percentages is bound to mask the challenges. If, for instance, our economy doubles in size or even triples, to the extent that everything is growing in the same proportion, the numbers will not change, even though we would have a much larger economy. This is one of the areas where statistics can be misleading. Recall our column titled “How To Lie With Statistics”, Thisday, Back Page, April 11, 2016.

I am of the strong opinion that for industrialisation to happen in Nigeria, the MSME should be at the driver’s seat. It therefore becomes very important that deliberate efforts be made to encourage the growth of this sector of the economy. To ensure growth, it may be important to understand that beyond the employment generation capabilities which have been aptly demonstrated by the data quoted above, there is also the strong potential of igniting the growth of the economy. As the economy grows, poverty will be reduced. The diversification of the economy which is at the centre of current government policy, cannot be achieved without the active contribution of the MSME sector. Perhaps one of the most important roles of MSMEs is driving innovation, creativity and development of indigenous technology. The discussion of promotion of local technology would amount to a farce if we do not have local entrepreneurs leading the way. 

Furthermore, while not disparaging large-scale projects in Nigeria, anyone who takes a close look at the economic history of the country will agree that our efforts in that area have met with many significant reverses. Projects like the River Basins, Ajaokuta Steel, vehicle assembly plants, and so on, are just examples of such ventures that could not take off in spite of the massive resources and efforts put into them.

So, how do we ensure that we promote MSMEs in Nigeria? We must first of all understand the problems they face and the solutions would be easy to find once we have the will. The first major problem is the cost of doing business in Nigeria which is astronomically high, making products and services, uncompetitive. The major reason for this is lack of infrastructure amongst others. If we are able to guarantee steady power supply, cost of production in some cases can go down by as much as 40% to 50%. This would in turn make the products more competitive. In a market that is not controlled, there is no way a product which is made, say in China, with its low labour cost and superior technology will not supplant a local product which may not even be the same quality with the imported one, even after taking care of logistics including cost of importation. Of course, we are also aware that there are circumstances where goods are deliberately dumped by foreign exporters into Nigeria. It becomes the responsibility of government to ensure against such sharp practices that have the potential of strangulating local producers and driving them out of business. Closely related to provision of infrastructure is the issue of red tape and bureaucracy. It is commendable that the government has focused on the ease of doing business which had led to improvement in our rating by 20 places in the relevant ranking. We, however, need to do more if our entrepreneurs have to be encouraged to become competitive.

Security is another major challenge that the country faces. It has become more serious in the recent times with increase in insurgency, kidnapping, armed robbery and attacks by herdsmen. To encourage and promote business in the country, security challenges must be seen and handled as an emergency. 

Just like Bill Gates told us, to achieve the required level of entrepreneurial progress, we must deliberately invest in Human Capital development. A poorly trained entrepreneur will produce mediocre results. Investing in human capital development would include training and retraining to ensure that skills are not only acquired, but that they are also updated to keep pace with changes in technology and modernization. This will also ensure that quality of products is up to speed with changing tastes and technology and costs are continuously brought down.

Again, the problem of access to both local and international markets cannot be overemphasized. Because goods and services can only be said to be completely produced when they end up with consumers, there must be deliberate efforts to create markets and the demand so created must be backed up by purchasing power to become effective. A situation where most people live below poverty line does not help the consumption of the goods and services made by the entrepreneurs. There must also be an attempt to move up from the present 7% contribution by MSMEs to exports to more reasonable numbers. This can only happen if the products are competitive both in terms of quality and price. To promote export, government must take interest in ensuring that locally made goods can compete internationally to enable entrepreneurs earn foreign currency and support the economy. Government should also use tax and tariff policies to promote local production and protect local industry and technology.

Most entrepreneurs you will meet complain about access to Capital as the major challenge they face. While this may be true, this is not limited to Nigeria, even though developed countries have found ways around this challenge by setting up all sorts of funds and intervention agencies. Apple, which is the most valuable company in the world today, faced the same challenge when Steve Jobs and Steve Wozniak started the company decades ago. Somehow, they were able to manage and the rest is now history. Banks in Nigeria generally believe that MSMEs are loss leaders and therefore are reluctant to extend credit facilities to this segment of the market. Experience has shown, however, that this is more of a myth than fact. The fact is that even though the chances of loan default are high with this sector, on account of the fact that one is dealing with diversified loans which are not concentrated, the chances of a critical mass of the facilities extended to the segment, going bad at the same time are very remote. Look at it this way, if a bank lends N500m to a big business, it may be easier to manage because the bank probably needs just one officer to manage the customer. But if that customer fails to perform, the entire N500m may go bad in one fell swoop. On the other hand, if the bank lent the same amount to 100 customers at N5m each, it would require more intensive management and therefore more hands. Chances are that a few may go bad, but certainly not all. Besides, whatever the loss norms are, the asset pricing model should be able to price the risk properly and because this segment of the market is very profitable, you will find that the facilities are able to pay their way. So, when banks are making those arguments, it is easy to hear what they are not saying: they need to manage headcount and cost. I know that some naysayers out there would ask what I did in my previous life in the banking industry. The simple answer is that I did exactly what I am proposing here and had very good results. The records are there to show and I remain proud of the team that worked with me at the time. In fact, we went beyond just lending to providing support for MSMEs by setting up clinics and free advisory and training services for them.

A few other challenges would include the unstructured way that some small businesses run, lack of proper bookkeeping and accounting principles, inability of entrepreneurs to partner with other entrepreneurs to pool resources and share risks and returns, and inability to muster up the required collaterals to secure loans from banks.

My contention is that even though there are challenges which will not readily go away, the greatest concern is the unavailability of the enabling environment that would positively and proactively encourage entrepreneurship. This environment must be created by government which should take deliberate interest in ensuring that more small businesses emerge. They need to be in existence to support industrialisation, creativity and innovation. If we do not start, we cannot improve. Innovation is only possible when creative people are encouraged to boldly experiment, fail, learn from failure and then succeed and reinvent themselves.